Efficient Markets Hypothesis
Andrew W. Lo, Ph.D.
- The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective
- Reconciling Efficient Markets with Behavioral Finance: The Adaptive Markets Hypothesis
- Efficient Markets Hypothesis
ANDREW W. LO is Harris &
Harris Group Professor at the
MIT Sloan School of Management,
and chief scientific
officer at AlphaSimplex Group,
LLC, in Cambridge, MA.
To appear in L. Blume and S. Durlauf, The New Palgrave: A Dictionary of Economics,
Second Edition, 2007. New York: Palgrave McMillan.
The Efficient Markets Hypothesis (EMH) refers to the notion that market prices fully reflects all available information. Developed independently by Paul A. Samuelson and Eugene F. Fama in the 1960's, this idea has been applied extensively to theoretical models and empirical studies of financial securities prices, generating considerable controversy as well as fundamental insights into the price-discovery process. The most enduring critique comes from psychologists and behavioral economists who argue that the EMH is based on counterfactual assumptions regarding human behavior, i.e., rationality. Recent advances in evolutionary psychology and the cognitive neurosciences may be able to reconcile the EMH with behavioral anomalies.
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